Click here for Full Issue of EIR Volume 9, Number 30, August 10, 1982

Part I: The Canadian Economy when the bank's chairman issued statements assuring the public that the bank was sound. The chairman of the Royal , Roland C. Frazee, sent letters to hundreds of branch managers instructing them on what to say to worried depositors.

An overview Canada is in the worst post-Depression debacle of any advanced-sector country. Every energy program near and raw materials-extraction scheme to loot this terri­ Big Five banks tory-Canada is barely a nation-has failed. A quick survey of Canada's economy shows that it is in the theedge of thecl iff midst of self-feeding collapse: • The prime rate charged by banks is 18.6 percent; by Richard Freeman the rate on mortgages for homes is 19.75 percent; and the rate on three-month Treasury biils is 16.5 percent, as of the end of July. By autumn, Canada may have its most spectacular bank • One and a third million Canadians were officially failure since the 1930s. The Canadian Imperial Bank of unemployed this June, out of a total labor force of Commerce (CIBC) will probably collapse. As of the end 11,902,000. That is a 10.9 percent unemployment rate. of 1981, the CIBC had assets of $66 billion Canadian or • The bankruptcy rate in Canada is two and a half about $52 billion American ($1 U.S. equals $1.28 Cana­ times the U.S. rate for individual firms, and America's dian), making it one of the largest banks in the world. rate is the highest since 1933. Half of Canada's mines The gentlemen who run Canada's Privy Council­ will be shut down by autumn. Thirty percent of the the real power in Canada, which makes decisions for country's lumber industry is already idle. Prime Minister Trudeau on behalf of Queen Elizabeth • The value of the stocks on the Stock II-look toward a CIBC failure not as a domestic calam­ Exchange had fallen 42 percent, again comparing June ity, but as a lever to collapse the American banking 1982 with June 1981. Oil stocks had fallen by more than system, should the Crown decide to go all the way with a third, wiping out $11.5 billion in paper values. Bank its plans to destroy the United States as a sovereign stocks fell by 29 percent; transport 44 percent; real industrial superpower. estate 46 percent. All told, the fall wiped out a nominal "A Canadian bank failure will spread like brush-fire $66 billion in stock holdings. to the U.S. and the rest of the world," stated Richard • Corporate profits in the first quarter of this year Coughlin, editor of the Toronto-based investment news­ plunged 59 percent from the level of profits in the first letter Bank Credit Analyst. one of the leading Anglo­ quarter of 1981. And profits in the first quarter of 1981 Canadian think-tank operations. Coughlin confirmed had already fallen 25 percent from the first quarter of that Canadian banks have borrowed $25 to $50 billion 1980. Of the' top Canadian companies, 22 had outright from American banks on the interbank market. Chase losses and 34 had declines in profit in the first quarter Manhattan, Citibank, Bank of America, and so forth, of 1982. made three- to six-month loans to Canada's Big Five • The Canadian dollar has been under severe at­ banks-Toronto Dominion, , tack-the Canadian government spent $2.9 billion in Bank of , Bank of Nova Scotia and Canadian June to try to stop its fall. But on June 28 the govern­ Imperial Bank of Commerce-or to their subsidiaries. ment announced a federal budget deficit for this fiscal Those banks account for no less than 90 percent of the year of C$19.6 billion, which, were Canada the size of assets in Canada's banking system. Were a major Cana­ the United States, would translate to a U .S.$200 billion dian bank like CIBC to fail, its interbank loans would be deficit, or double the largest deficit that the Reagan in default. "The U.S. Federal Reserve Board would have administration has produced. to come in and bail out the mess," stated Coughlin. The collapse of the Canadian banking system is The Big Five's bad loans already under way. On July 8, a member of the British It would be remarkable if, with its industry withering Columbia provincial legislature announced on the floor under 18.6 percent prime interest rates, and the specu­ of that body a rumor that CIBC was close to receivership. lative natural resourcesi and real-estate side of the The next day, investors withdrew $148 million from the economy falling into oblivion, the Canadian banks bank. In Newfoundland, a large run started at the could escape collapse. branches of the Bank of Nova Scotia was only quelled The most likely to go is the Canadian Imperial Bank

6 Economics EIR August 10, 19H2

© 1982 EIR News Service Inc. All Rights Reserved. Reproduction in whole or in part without permission strictly prohibited. of Commerce, as stated above. CIBC's immediate prob­ lem is a Dome Petroleum default on its more than $1 urren Rates billion in debts by September. C cy The Big Five Canadian banks have lent Dome $4 billion. They only have $9 billion in capital (stock value of their own banks, plus retained profits). Were Dome to totally default, half the capital of the Big Five-and they comprise 90 percent of the banking system-would evaporate. Of course some of these loans are secured The dollar in deutschemarks against assets, but in a deflated oil market the value of New York late afternoon fixing -- such assets dwindles. 2.45 "" ,/ Dome is not exactly a special case. During the post- !'" -" l' V 1978 period, when takeovers, financing, real-estate 2.40 -,..... 1\ loans, and lending to oil firms went on at an increasing­ V I 2.35 I I I I ly frenzied pace, the Canadian banks were hardly ex­ I amples of "prudent lenders." In July 1979, total loans 2.30 J made by Canadian banks to Canadian consumers and 2.25 corporations totaled $73.6 billion. This zoomed to 6/9 6/16 6/23 6/30 7/7 7/14 7/21 7/28 $120.6 billion, an increase of 64 percent, by November 1981. Since that time, under the monetarist regime of The doUar inyen Bank of Canada chief Gerald Bovey, the level of loans New York late afternoon fixing .-.. has stagnated. - - -- � CIBC, in addition to its $1.4 to $1.8 billion in loans 250 �� �� � to Dome, made $400 million in loans to Massey-Fergu­ rv r � -_. son and $500 million in loans to Turbo resources. Royal Bank of Canada made $400 million or more in loans to 230 Sulpetro oil. And so on. 220 The danger is not only that these and other loans will go bad, but that at a certain point, the Big Five 210 6/9 6/16 6/23 6/30 7/7 7/14 7/21 7/28 banks will not have enough funds to covel," their bad loans without calling back outstanding loans to other companies. This could also happen if depositors began The dollar in Swiss francs withdrawing funds from the banks. Calling in loans New York late afternoon fixing during a depressionary collapse is the process by which lr-\. 2.10 ,...... ".,. � � "'\ II a banking crisis explodes. Hugh Brown, a leading bank ...... 1 I I� analyst with the Toronto investment dealer Burns Fry 2.05 ,� i I -� ---- - .. . _. stated July 6 that the banks "have less ability now to V 2.00 I� � survive a depression than they did in 1933." I Many Canadian bank analysts are reporting that 1.95 ----- I i I Canadian banks will have to report $1.5 billion in bad­ 1.90 i I loan losses this year. And, according to the Toronto­ 69/ 6 16 623 630 7 7 14 7 21 72/ 8 based McCarthy Securities firm, another $5.3 billion of loans do not currently pay interest. These loans become defaults if the recession deepens. The Canadian banks The British pound in dollars New York late afternoon fixing also have a very large exposure to Third World debt­ perhaps a third of the Big Five bank loans are interna­ 1.85 tional loans. I I 1.80 Bank Credit Analyst's Richard Coughlin reported

July 23 that the Canadian government might try to save 1.75 � ,.. CIBC by nationalizing the bank. However, even were r---- - � 1.70 � rr- that to happen, "there would be tremendous repercus­ sions for the international banking system," he said. 1.65 Canada might default on a portion of the $25 to $50 6/9 6/16 6/23 6/30 7/7 7/14 7/21 7/28 billion in loans that it owes U.S. banks on' the interbank market.

EIR August 10, 1982 Economics 7